Land reform uncertainty, ongoing drought reflect in farmers' spending - Kaap Agri CEO

Sean Walsh (Supplied)
Sean Walsh (Supplied)

Uncertainty about land reform policies as well as an ongoing drought in certain areas continue to impact spending by farmers, according to Sean Walsh, the CEO of Kaap Agri. 

The JSE-listed group, which trades in agricultural, fuel and related retail markets in Southern Africa, released its results for the financial year to September 2019 on Thursday.

"Farmers are prudent about spending capital until there is more certainty. Another impact is that European markets are all in a downward economic trend, which in turn mainly impacts access for SA fruit exporters, despite the fruit sector in the Western Cape having a good year, mainly due to improved dam levels," said Walsh told Fin24. 

The Swartland is currently the main drought area of concern for Kaap Agri due to the wheat yield being impacted.

"The bottom line is that farmers have less disposable income, so they must spend less on the replacement of capital equipment, for example. All that feeds through to impact rural economies. Due to increasing unemployment, it also means fewer people in the market with money to spend," said Walsh.

Kaap Agri employs over 3 200 people and has 213 operating points across SA and Namibia. Its brands include Agrimark, Wesgraan, Pakmark, Liquormark, Agriplas, The Fuel Company (TFC) and Expressmark. Kaap Agri also owns a 60% shareholding in Partridge Building Supplies, which trades as Forge in Southern KwaZulu-Natal (KZN).

For the financial year, it announced a 6% increase in recurring headline earnings per share to 375.19 cents, resulting in a five-year compound annual growth rate of 10.9%.

Although agricultural conditions improved in the northern parts of the country, income remained under pressure and reduced year-on-year by 1.3%. However, through margin opportunities and good cost control, operating profit before tax increased by 0.6%, according to a group statement.

Revenue increased by 29.1% to R8.5bn with like-for-like comparable growth of 7.6%. This growth was mainly driven by a 10.6% increase in the number of transactions stemming from strong organic growth and expansion activities.

A final dividend of 90.00 cents per share – compared to 84.70 cents in 2018 - was declared, bringing the total dividend for the year to 123.50 cents per share, representing an increase of 5.8% from 2018.

According to Walsh, the group's ongoing diversification strategy and resilience continue to yield strong revenue growth. During the financial year, retail profit growth again outperformed agricultural profit growth and fuel contributions showed steady growth, providing evidence of the success of the group’s diversification strategy, he said. 

Furthermore, it is forecasted that the company will achieve a Level 3 contributor BEE status with a 110% recognition for procurement spend.

Operating results and outlook

Income growth from the trading division, which includes Agrimark stores, Forge, Pakmark, as well as mechanisation services and spare parts, increased by 20.6% year-on-year with operating profit before tax declining by 0.4%.

Wesgraan, which includes grain handling and storage of grain and related products, recovered from the previous year's drought-related performance, increasing income by 91.5% and growing operating profit before tax by 113.8%.

The Fuel Company (TFC) had income increasing by 36.4% and operating profit before tax increasing by 18.0%.

In general, the group has continued to expand its footprint and improve existing offerings during the year, including the acquisition of The Forge in KwaZulu-Natal.

As part of its growth strategy, a new wholly owned subsidiary, Tego Plastics has been established, which will initially produce high-quality, food grade plastic bulk bins for the agricultural market.

"We like to see our company well balanced regarding diversification between agriculture, retail, the fuel sector and the convenience sector. A decade ago we were 75% focused on agriculture retail and now non-agricultural product categories already account for more than 50% of our gross profit," Walsh told Fin24.

The group anticipates that retail sales and general retail performance will remain under pressure in the short-term as a result of subdued consumer confidence and spending, and any potential exchange rate weakening will negatively impact product and raw material imports.

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